A. Field of Invention
This invention pertains to a flexible electronic trading system which enables buyers and sellers to trade commodities whereby the commodities traded are authenticated and securitized by a third party. The invention further pertains to a method of trading in which entities, including individual as well as institutional, corporate and fiduciary investors and traders can purchase and sell commodities without resorting to a traditional exchange environment where third parties in addition to the buyer and seller must participate.
B. Description of the Prior Art
Any item that can be traded is a commodity. Thus, commodities include intangibles such as stocks, bonds and options, as well as tangibles such as gold, real estate and works of art.
There have always been means to trade commodities. In earlier times, when commerce was less complex, it was a simple matter for buyer and seller to meet face to face and consummate a sale with physical assurance that what was being traded had been verified. As commerce became more complex, it became necessary for institutions such as stock exchanges and third parties such as brokers, agents and market makers to facilitate the buying and selling and to assure the validity of that which was sold.
Most recently the trading of intangibles have been facilitated by the increase in the number and variety of form of exchange systems, most notably the electronic communication networks (xe2x80x9cECNxe2x80x9ds). Their existence has greatly enhanced the economic efficiency of these markets by providing faster trading and more open access to specific items being traded.
The individual investor, however, remains removed from the direct trading environment. The individual investor must deal with a variety and number of people when negotiating and consummating a transaction with another individual. Thus, when an individual decides to buy or sell a commodity, he still must place this order with another party who will decide how to process this order. This results in costs of handling each transaction by a number of people and a time delay in execution of the transaction. The delay alone can be costly in a dynamic market. Also, if the individual wants to buy or sell a commodity, such as a stock or bond, which is seldom or infrequently traded, he has no means to directly communicate with a potential buyer or seller except through a third party. This third party often makes a market in the commodity, allowing for arbitrary economic large spreads between the bid and ask and resultant purchase and sale prices.
The individual investors have been left out of this trading environment because none of the existing systems either allow them to trade with each other (or directly with other entities) or have the means necessary to validate investors"" ability to consummate a transaction. It is this understanding of these problems which provided the impetus for the present invention.
Some automated systems related to commodities trading and the like are described in the following references:
U.S. Pat. No. 4,751,640 describes an automated investment system for investment banks in which idle funds of customers are invested in commodities designated by the customer.
U.S. Pat. No. 5,262,942 describes a financial transaction network in which mutual funds are maintained in different currencies and are transferred between customers at will.
U.S. Pat. No. 5,809,483 describes an online transaction processing system which provides current trading information to customers.
U.S. Pat. No. 5,845,266 describes a network utilized to match buy and sell orders for commodities.
U.S. Pat. No. 5,873,071 describes an order management system for negotiating the exchange of commodities.
U.S. Pat. No. 5,890,138 describes a computer-based auction system.
U.S. Pat. No. 5,897,621 describes a system for buying goods or services from a merchant using multiple currencies.
U.S. Pat. No. 5,903,878 describes a system for electronic commerce in which each transaction is validated by using a special transaction identifier.
U.S. Pat. No. 5,905,974 describes a system for auctioning fixed income commodities.
U.S. Pat. No. 5,915,023 describes a system for selling goods or services through a third party.
In view of the above, it is an object of the present invention to provide a system which provides total ability of individual investors to purchase and sell commodities directly between each other with no effective delay between the time of order and the time of execution.
A further objective is to enable the purchase and sale of commodities to take place with the elimination of the spread between the selling price and the purchase price presently common to existing transactions between individual investors.
A further objective is to provide a trading system which can be used to trade commodities between buyers and sellers without the need for a conventional commodities exchange and associated commission charges and/or transaction fees.
A further objective is to provide a trading system in which every trade or transaction is automatically secured to insure the comfort and trust of all the participants in the trade.
Yet a further objective is to provide an automated commodities trading and method in which a large number of transactions can be completed rapidly and economically.
Yet another objective is to provide a trading system in which commodities which are rarely traded are readily available to a potential buyer or seller.
A further objective is to increase liquidity of less frequently traded commodities by making known their availability for purchase and sale.
Other objectives and advantages of the invention will become apparent from the following description.
In its broadest aspect, the subject invention pertains to an automated commodities trading system including an open commodities exchange server (OCES) which can be accessed by a plurality of customers and at least one custodian in communication with said OCES. Commodities, funds and other assets used for trading are deposited by the customer with the custodian.
The customers can participate in two kinds of trades: placing orders for commodities or responding to offers by other customers. When a customer places an order on the OCES, a request is sent to the custodian to securitize the order, meaning that the custodian verifies that the customer has the proper commodities, assets or funds to meet the order, and, optionally segregates or otherwise separates the same to an escrow account. After an order has been securitized, it is posted to an appropriate data base and becomes an offer.
A response to an offer is securitized in the same manner as an order. Once a response to an offer is securitized, the offer is executed and the buyer and seller customers, as well as the custodian(s) are notified, and the order is settled.
Briefly, a system for trading commodities includes an open commodities exchange server (OCES) provided to receive a plurality of orders to buy and sell commodities from a plurality of customers. The OCES is also coupled to one or more custodians. Before being allowed to trade, each customer must deposit with a corresponding custodian the funds, commodities and other marketable assets the customer may wish to use in the purchase and sale of commodities through the OCES.
Whenever a customer initiates a trade through the OCES, OCES requests confirmation and securitization from the appropriate custodian, whereby the custodian segregates or otherwise blocks the appropriate assets of the customer and acknowledges the same to OCES. In this description, the term xe2x80x98tradexe2x80x99 is used to refer generically to any conventional commodities exchange, including either
(1) an order to buy or sell commodities; or
(2) a response to a posted order to buy or sell commodities. Moreover, an order to sell a commodity could be a xe2x80x98shortxe2x80x99 order covering a commodity which is not in the possession of the customer. Short orders are securitized by other assets of the customer, or by other means as prescribed, for example, by government regulations. Once confirmation is received, the offer (if any) is posted on the OCES.
The settlement for the trade is performed by the custodians.
The custodian may be an independent entity; it may be associated with banks, brokerage houses or other similar entities normally involved in trading or may be established specifically for this purpose.
Generally, the present invention covers an automated commodities trading system for trading a commodity between a first and a second customer with an asset or payment being deposited with a custodian on the account of said second customer, said commodity being deposited with a custodian on the account of said first customer, said system including an open commodities exchange server (OCES) arranged and constructed to communicate with all parties involved, and to manage requests to buy and sell commodities from said customers. A custodian server is associated with the custodian and can access data identifying assets and commodities held by said custodian.
The OCES generates messages to said custodian servers in response to requests to confirm that the custodians have said assets and commodities in escrow. The custodian receives the messages and generates an acknowledgment based on the data identifying said assets. The OCES generates a transfer message in response to said acknowledgments to transfer said stock to aid second customer and payment to said first customer.
More specifically, a commodities trading system for trading a commodity between a first and a second customer is disclosed having a first data base holding data indicative of a commodity being held by a custodian on behalf of said first customer; a second data base holding data indicating the assets of said second costumer (or other indicia showing that he has the ability to pay), an open commodity exchange server (OCES) being in communication with said first and second data bases and said first and second customers and receiving a request for transferring said commodity from said first to said second consumer, the OCES being arranged to confirm that said first commodity is securitized. The OCES is also arranged to confirm that said second customer has assets to pay for said commodity by contacting said second data base. The OCES is constructed and arranged to allow said transfer only after confirming that the transaction is secure.
The system may also include a first custodian server associated with a first custodian, said first custodian server being connected to one of said first and second data bases. The custodian is associated with said first data base and is adapted to securitize the commodity.
In addition, a method of trading commodities on an automated distributed system including an open commodities exchange server (OCES), a first data base indicating that a commodity is deposited with a custodial facility on behalf of a first customer and a second data base indicating that a second customer has assets to pay for commodities presented, the method including generating a request to said OCES to trade said commodity between said first and said second customers; generating a first confirmation request by said OCES that said first customer has rights to said commodity; generating a second confirmation request by said OCES that said second customer has the required assets; generating a first response from said first data base to indicate that said first customer has rights to said commodity; generating a second response from said second data base to indicate that said second customer has the assets; and responsive to said first and second responses, transferring said commodity from said first to said customer in return for said assets. The method further includes generating an offer to sell said commodity by said first customer and an offer to buy said commodity by said second customer; and comparing said offers by said server and initiating said transfer if said offers meet a predetermined criteria. Preferably, prior to confirmation, said commodity and the corresponding assets are securitized by the corresponding custodians.
As part of this method, prior to any trading, each customer may be required to register with the server and with a custodian. As part of this registration, the customer gets an identification and password for the system. The customer must also deposit with the custodian his commodities. Before he can buy any commodities, a customer must also register with a custodian and either deposit funds or other assets or provide sufficient information to receive a credit rating for a particular amount. Since most customers want to buy and sell commodities, it is expected that they deposit with a custodian their commodities and assets at the same time. Prior to any trade by a customer to sell a commodity the server receives confirmation through the appropriate custodian it has custody of the subject commodity and therefore that the customer has the right to sell the same and that the subject commodity have been securitized. Prior to any buy trades, the server obtains confirmation from the appropriate custodian (which may be the same custodian as the one confirming the commodity) that the customer has deposited sufficient assets to purchase the funds and that these assets have been securitized. In effect this confirmation indicates that the customer has the ability to pay for the commodities he is wants to buy.
Finally, a method of trading commodities is presented by generating a request to trade a commodity between said first and said second customers; confirming that said first customer has rights to said commodity (or assets to pay for the same if he is selling short) and that the commodity (or assets) has been securitized; confirming that said second customer has the assets for paying for said commodity and that said assets have been securitized; and if both conditions are met, transferring said commodity from said first to said second customer.